Trading weather related risk

CME Group Overview:

As the world's leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. Through its exchanges, CME Group offers the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural products, metals, and alternative investment products, including alternative investment products based on weather and real estate. CME Group provides electronic trading globally on its CME Globex platform. CME Group's products and services ensure that businesses around the world can effectively manage risk and achieve growth.

Traders from all over the world come to a futures exchange for a stable, regulated, transparent and liquid venue on which to buy and sell futures contracts. These exchanges were born on the streets of Chicago, eventually moving indoors to the bustling open-outcry pits we've historically associated with the concept of trading. Today's exchanges are almost entirely electronic, executing millions of trades per second and offering market participants around-the-clock access to the global markets. CME Group's clearing house stands at the center of every trade, acting as the buyer for every seller and the seller for every buyer, ensuring that each side can make good on the terms of the trade and protecting the integrity of the market.

Impact of Weather:

Many conversations begin and end with the weather. That's probably because weather is one of the most common and pervasive risk factors for individuals and businesses. Weather influences demand for energy, variations in crop yield and fluctuations in consumer prices. It creates costly delays in construction and influences home improvement company sales. It causes postponements and cancellations in travel, and makes or breaks seasonal retail sales and activities. Weather can affect the revenues and earnings of companies doing business anywhere across the globe.

Weather cannot be controlled, but CME Group's products can help investors and businesses manage their weather-related risk. CME Group's Weather products offer the ability to manage volumetric risk or the risk due to variability in sales revenues, caused by weather-related fluctuation in levels of consumption. Using weather products can help companies optimize their operations and reduce earnings volatility. Benefits of participating in CME Group's global weather risk management market include:

Market Participants:

All kinds of people come to futures exchanges, to buy and sell futures and options contracts. They may work for banks, corporations or governments. They may be livestock ranchers, investment managers, construction planners, farmers or food manufacturers. Really, futures trading involves just about anyone in the world who wants either to manage the risk of fluctuating prices or profit from those fluctuations. But whoever they are, and wherever they came from, these traders are interested in two types of trading: hedging and speculating. Hedgers transfer risk, and speculators absorb that risk. It takes both types of traders to bring balance to the market and keep trades moving back and forth.

Hedgers

The hedger buys futures contracts because he wants to protect himself from price swings in the future. By using futures to lock in a future price for a product, he makes his costs – and his profits – more predictable. In other words, he trades futures to drive risk out of his business. Hedgers that use Weather products to hedge risk include companies in energy-related businesses, as well as agricultural firms, re-insurers, retailers, and companies involved in tourism and travel. Many over-the-counter (OTC) weather derivative traders also trade CME Group's Weather products for purposes of hedging their OTC transactions.

Speculators

The speculator accepts price risk in pursuit of profit. Speculators have no interest in owning the product being traded, but they are interested in the contracts for those products. Think of it like investing – buying and selling futures contracts in order to make a profit when prices move in the right direction. These investors include every type of participant from hedge funds, prop firms and large banks to active individual traders.

Temperature Based Products:

CME Group offers Heating Degree Day (HDD) and Cooling Degree Day (CDD) temperature based weather products for the United States and Europe. (See Table Below).

The HDD and CDD Indexes identify what are called degree days. A degree day is a measure of how much a day's average temperature deviates from 65 degrees Fahrenheit (or 18 degrees Celsius outside the United States). Average daily temperature is defined as the average of a day's maximum and minimum temperature. Index values are multiplied by a cash amount for settlement. All of our Weather contracts are settled in cash.

To determine an HDD value, subtract a day's average temperature form 65. For example, if the average daily temperature was 40 degrees, you would subtract 40 from 65. For cities outside the United States, the process is the same, except the calculation is done using 18 degrees on the Celsius scale instead of 65 degrees on the Fahrenheit scale. If the temperature exceeded 65, the value of the HDD would be zero.

To determine a CDD value, subtract 65 from a day's average daily temperature. For example, if the average daily temperature was 80, you would subtract 65 from that number. If the temperature was lower than 65, the value of the HDD would be zero.

The Cumulative Average Temperature (CAT) Index is used for the summer season contracts in Europe. The CAT Index tracks average daily temperatures over a calendar month in a given city, and that average number is used to calculate a Weather contract value – there is no baseline 65 degree temperature with which HDD or CDD is established. Each particular CME European CAT Index is the accumulation of daily average temperatures over a calendar month or season. The accumulation period of each CME European CAT Index futures contract begins with the first calendar day of the contract month and ends with the last calendar day of the contract month.

Weather Futures and Options Codes

Heating (HDD) Futures and Options

CITY CODE

OCT

NOV

DEC

JAN

FEB

MAR

APR

U.S.

Atlanta

H1

H1V

H1X

H1Z

H1F

H1G

H1H

H1J

Chicago

H2

H2V

H2X

H2Z

H2F

H2G

H2H

H2J

Cincinnati

H3

H3V

H3X

H3Z

H3F

H3G

H3H

H3J

New York

H4

H4V

H4X

H4Z

H4F

H4G

H4H

H4J

Dallas

H5

H5V

H5X

H5Z

H5F

H5G

H5H

H5J

Las Vegas

H0

H0V

H0X

H0Z

H0F

H0G

H0H

H0J

Minneapolis

HQ

HQV

HQX

HQZ

HQF

HQG

HQH

HQJ

Sacramento

HS

HSV

HSX

HSZ

HSF

HSG

HSH

HSJ

EUROPE

London

D0

D0V

D0X

D0Z

D0F

D0G

D0H

D0J

Amsterdam

D2

D2V

D2X

D2Z

D2F

D2G

D2H

D2J

Cooling (CDD) Futures and Options

CITY CODE

APR

MAY

JUN

JUL

AUG

SEP

OCT

U.S.

Atlanta

K1

K1J

K1K

K1M

K1N

K1Q

K1U

K1V

Chicago

K2

K2J

K2K

K2M

K2N

K2Q

K2U

K2V

Cincinnati

K3

K3J

K3K

K3M

K3N

K3Q

K3U

K3V

New York

K4

K4J

K4K

K4M

K4N

K4Q

K4U

K4V

Dallas

K5

K5J

K5K

K5M

K5N

K5Q

K5U

K5V

Las Vegas

K0

K0J

K0K

K0M

K0N

K0Q

K0U

K0V

Minneapolis

KQ

KQJ

KQK

KQM

KQN

KQQ

KQU

KQV

Sacramento

KS

KSJ

KSK

KSM

KSN

KSQ

KSU

KSV

EUROPE

London

G0

G0J

G0K

G0M

G0N

G0Q

G0U

G0V

Amsterdam

G2

G2J

G2K

G2M

G2N

G2Q

G2U

G2V

Heating (HDD) Seasonal Futures and Options

ATLANTA*

END

END

Start

MAR

FEB

NOV

H1XH

DEC

H1ZG

* Replace city code for appropriate city.

Cooling (CDD) Seasonal Futures and Options (CAT for London and Amsterdam)